Expert: Jim Avancena, CPM - 8/15/2010

Question
Hello Jim
I am trying to find how to maximise my tax position for for a small office building in the Auckland CBD area, New Zealand, for a Family trust, that is.
Also, I'm trying to find out how I can share the OPEX costs with my landlord under a net lease approach.
The following, are some answers I came up with and I'm wondering if they could be correct by any chance;
Tax maximization on income can be achieved through mainly; interest on loan and depreciation, also the liability of all operational expenses costs by claiming tax return on all claimed expenses including;
•   Accounting fees
•   Advertising
•   Agents fees an commission
•   Communication
•   Insurance
•   Legal fees
•   Mortgage repayment insurance (fully deductible if for property rental purpose)
•   Motor vehicles
•   Rates (Fully deductible)
•   Repairs and maintenance (only minor repairs for the first Year)
Second question:
Only, energy (electricity, gas, etc), insurance and rates together make up nearly over 50% of the actual annual cost of operating expenses.
Insurance costs can be quite high depending on the location of the property that is regarded as a risk (earthquake, flood, etc) to the insurer’s firms.
OPEX costs also depends on the property grade, for example in Auckland CBD
A grade will cost around $114/m2
B grade will cost around $86/m2
C grade will cost around $73/m2
The economic downturn leads property owners to an increase pressure in holding down OPEX charges, meanwhile, tenants look to minimise their occupancy costs (Nicholas Piper Bayleys Property Services).
In Wellington, landlords consider OPEX as a package included in the actual rental cost that is part the gross lease approach for years, as for Auckland; the net lease approach is the most common method that has been operating for years. However, in a downturn economic climate as mentioned above, landlords must contribute with some of the OPEX costs with the Tenants in order to prevent any vacancy.
In reference to Piper’s report, in some places of the country including Auckland, the increase of vacancies will have to keep most landlords away from the net lease knowing that Tenants in our days are more aware and focused a lot on their occupancy costs on the top of the rental figure.
Even though we have the task to protect our Clients interests to an extent, does not mean to lead our Client into vacancy and financial loss position, therefore, the Family trust should come to some sort of arrangements with the future potential Tenant to share some of the OPEX costs.
At a first stage, it is essentially important to consider that repair and maintenance works costs are undertaken by the tenant on the top of energy expenses, with occasional site visits that is.


Answer
Marco:

I am not certain that I understand what your intentions/goals are regarding the Net lease arrangement.

As you know, a Net Lease is an agreement for the landlord to allow the tenant to occupy the property for a stipulated payment of rent over the lease term, and the tenant agrees to pay all of the other costs necessary to operate and maintain the property in essentially the same condition as it was received from the landlord.  Often the agreement will provide that the occupant will pay the debt service for the property.

Virtually any arrangements can be inserted into the Net Lease structure that revise the terms of who pays for what expenses as long as both parties agree in writing.  Regardless of the state of the economy, any revisions to the Net Lease agreement are a matter that must be negotiated by the parties.

If you believe the family trust is going to lose an existing tenant because the tenant cannot continue to pay for the costs stipulated in the lease, or the trust will not be able to find an interested tenant to Net Lease the property because the terms being offered are more than a prospective tenant will pay in this economy, then you should advise the trust of the Net Lease terms you believe are - in your judgement - necessary to retain an existing tenant, or to successfully find a new tenant.

Always be certain that site visits are frequent.  It is in the interest of both parties that the property continues to be maintained in good condition.

I am not certain I understood your question, please send a follow-up question to clarify your concerns if I have not given you a response that is helpful.

Good luck,

-Jim